Among the drivers of Brexit, “Trumpit” and of the rejection of international trade agreements – such as the Comprehensive Economic and Trade Agreement (CETA) signed between Canada and the EU – are concerns with the growth of supranational regulation (SNR) of services. Alongside discontent with the distribution of the gains of globalization, the loss of sovereignty associated with the transfer of regulatory powers to supranational agencies and international arbitration tribunals does not sit well with many in civil society.
And yet, SNR started from a good intention. The increased scope for international trade and investment in infrastructure, health and education services during the last 20 years or so had induced a natural case for SNR. Without coordination, regulatory differences across countries would affect comparative advantages and risk allocation across countries. This would result in production and distribution location arbitrations, penalizing both users and producers. In the case of European energy and transport infrastructure, for instance, differences in national regulation and ineffective SNR have limited the incentive for much needed new cross-border investment. As a result, today many European countries are exposed to power outages, insufficient beds in hospitals, too many cars and trucks on their roads and too few trains on their tracks.
So what’s wrong with the design of regulation so far in this globalized world? Three explanations have been given some credit by analysts. First, regulators are not as benevolent as assumed: they may have been captured by the industries they are supposed to supervise. Second, they may not be as competent as they should be: their skill mix, tools, enforcement capacity and formal mandates are inadequate. Third, they are not able to commit policies for a duration that matches the life of the regulated assets: there is concern about de-facto expropriation of assets through politically driven renegotiations. Each of these concerns in fact applies at supranational and national levels. Simply and specifically this means that implementation details are a lot more important than designers of SNR assumed, with too much disregard for the national sectoral, institutional and political characteristics of the activities to be regulated.
This may be a good time to step back, return to the drawing board and re-design the SNR of many services and public services in particular. The new design needs to account significantly better for all national institutional weaknesses, ranging from corruption at all levels of political and bureaucratic institutions to the need to minimize the unacceptable social consequences of policies. The current design is too focused on efficiency and on investors’ protection without seriously sizing up the returns for these investors. Theory and recent empirical research have much to offer in this redesign. When politicians and supran ational bureaucrats are ready, academics will be happy to help. But it seems the political will is not yet there. So we must all expect to continue paying too much for these services and to be rationed in quantity and quality… for some time more.